GDP Is a Lie – It’s Time for a New Measure of Economic Growth

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Gross domestic product (GDP) is the most commonly used measure of economic growth. But GDP isn't just inaccurate and misleading – it's the contrivance of Keynesian economists seeking to push their own, big-government agenda.

That's right. GDP is a financial ruse – the biggest of the past half-century. And it's time to move past it to another, more accurate measure of economic growth.

Keynesian economist Simon Kuznets designed GDP at the height of the New Deal era. Kuznets first revealed the measure in a report to Congress in 1934. GDP takes into account consumption, investment and government expenditure to create a measure of economic growth.

But the Keynesians employed some chicanery, or sleight-of-hand, to generate this statistic. A close look reveals the dirty little secret about GDP: It intentionally overplays the importance of government spending – and in doing so inflates the role that Washington plays in each of our lives.

And it's been doing this for 77 years …

The Biggest Lie of the 20th Century

Gross domestic product is supposed to be a measure of all the goods and services produced here at home.

But there's a discrepancy.

You see, private-sector output is measured by the price people are prepared to pay for it. But government output is fudged: It's measured by its cost.

That means GDP increases any time the government spends money. It doesn't matter if that money is actually put to productive use or not – GDP rises nonetheless.

The bureaucrat devising regulations that damage business? His salary increases GDP. The $300 million Alaskan "bridge to nowhere" of a few years back? That was $300 million added to GDP. The jet-fighter project that costs billions, and is plagued by huge overruns that lead to its cancellation? Those billions add to GDP.

Even public-spending "stimulus" programs, however foolish, are always effective according to the GDP definition, because their cost is simply added to output.

It's obvious why big-government Keynesians would like this calculation: It substantiates their claim that government spending stimulates economic growth.

In the real world, however, this makes no sense. Indeed, none of the examples above actually add to economic welfare.

Don't misunderstand – some government output is very valuable. We could not exist in a free society without a court system that protects our property rights and a national defense that protects our borders. In most other cases, however, if government output were truly cost effective, the private sector would've already taken the initiative (and probably done so at lower cost and greater impact).

So how can you get an accurate measure of economic growth?

Arithmetically, there's a simple solution: You take Line 1, "Gross Domestic Product," in the Bureau of Economic Analysis' GDP Table and subtract from it Line 21, "Government Consumption Expenditures and Gross Investment."

That gives you a net number, which we can call "gross private product," or GPP. It's a measure of all the output produced by the private sector. In general, it will underestimate national "welfare" unless government is really bad. But it will give you a much better idea of the output the market economy is producing.

Keynesians like to proclaim that World War II got America out of the Great Depression: Thus, if you make stimulus big enough, it will solve economic problems.

This is the biggest lie of the 20th century.

A New Measure of Economic Growth

If you look back through history, and look only at GDP, it seems correct. After all, GDP did increase sharply during World War II.

But if you look at GPP, the real story becomes quite clear.

GPP declined somewhat more than GDP at the beginning of the Depression, as U.S. President Herbert Hoover threw money about in a futile attempt to stop the horrific downturn.

Then it increased somewhat more slowly than GDP during the 1930s, falling back in 1937-38. GPP really took off after that, rising at more than 9% per annum in 1938-40. New Dealer losses in the midterm elections of November 1938 had put an end to some of the group's spending and most of their meddling.

When war came, GPP collapsed while GDP rose. By 1944, GPP was down to half its 1940 level, and 25% below where it was in 1932 at the trough of The Depression. Then when war ended, it took off. In 1946, while GDP fell, GPP more than doubled, as the economy was converted to peacetime. Overall, however, the GPP level in 1946-48 was about 10% to 12% lower than it would have been had the 1938-40 recovery continued – or had the economy continued steady growth after 1929.

By the GPP measure, the U.S. economy was recovering quickly by 1940. The war caused a huge downturn, but postwar reconstruction saw it bounce back, although not quite to the level it would have reached had the war not happened.

That narrative makes far more sense than the conventional Keynesian fable – that the manufacture of guns, tanks, uniforms and other instruments of war alone led to an economic revival.

Under Keynesian analysis, all the money spent making weapons and munitions to fend off aliens would boost the economy, as it allegedly did during World War II.

But by using GPP analysis, we can be smarter than that. We know a major anti-alien war effort would damage private output, and potentially push the U.S. Treasury into bankruptcy.

Gross private product also tells us a couple of other things.

To begin with, the federal government's $800 billion-plus in stimulus spending didn't work. The quarters in which government spending increased the most saw sharp declines in GPP. Conversely, the best quarters of growth since 2007 were in the two winter quarters of 2009-10, when government growth stopped and even shrank slightly (mostly at the state and local level).

Of course, there's also some good news. GDP in the first half of 2011 expanded at a lousy 0.8% per annum, slower than population growth. However, GPP did significantly better, growing at a rate of 1.9% – as the government once again shrank somewhat.

Fantastic – I love this article. That is also perhaps the real truth behind the Chinese miracle – the super speed trains (maybe worth half their cost) and the ghost towns all contribute to the 9% compound growth – some of this 9% may be real GPP. Wow, I only wish the "Readings in Keynesian Fraudsterism", compiled of articles like this, is made compuslory reading for all students of economics and finance from high school upwards and also for all economics/ politics and business journalists. This is why the Keynesian fraudsters conjure up econometrics that "proves" that the stimulus worked!!

At last someone has revealed this giant fraud called, GDP, We have been screaming about it for years.

We were told the USA adopted this scheme so our figures would match those of Europe. In reality, it has given governments a way to justify their own growth. They have been saying: " We are only spending 40% of GDP, and that's not so bad". Actually they were spending, recently, 110% of GDE (Gross Domestic Earnings).
No wonder the whole world is in trouble ! Is everyone asleep? Doesn't anyone think anymore? KWS

I think it is normal for the GPP to fall and government spending (GDP-GPP) to rise due a major war effort. We can not expect private spending to rise in the middle of war. People would postpone major spending and investment and wait for the war to end. And a question : Who built the uniforms, munitions, guns etc? Didn't the government procure most if not all of it from the private sector? Now is this private output or government output? I agree that such production may not provide utility to civilians and enhance their quality of life.. But private enterprises made profits out of it for sure, and many people got salaries working to produce them. These might have in turn provided the savings and capital built up that could have added up to the post war boom in GPP.

Get real Hayri. Apart from national infrastructural expenditure on things like roads etc, most governmental outflows are totally unproductive and don't contribute to true productive capacity at all. "Investment" in war effort is counter productive in that, despite the apparent creation of jobs and income, the money spent is all either destroyed or consumed. No person or country ever created net wealth by consuming more than it produced, which is what America has been doing for years now, resulting in an economy which is totally broken. The only thing temporarily masking this disaster, is the mistaken belief that the "mighty" dollar is the only true international currency, which enables the irresponsible, unlimited printing of dollars to pay down the US debt.
Never mind the size of the reported National debt, the under-funding of retirement, medicaid and
other give away programes, makes this number look like chump change. Governments have never created wealth, all they do is destroy it and idiot constituencies keep on voting these clowns into power. One of the commentators to this column asked above, whether anybody is thinking anymore. The answer is obvious.

Frank misses the point just slightly when he writes "Apart from national infrastructural expenditure on things like roads etc, most governmental outflows are totally unproductive …" Even all that infrastructure is heavily freighted with waste. And, I don't just mean the frivolities like a "bridge to nowhere" in Alaska or urban mass transit systems that cost several dollars per rider to operate and generate only a fraction of that in fares paid by those riders. The dirty little secret is that this stuff is built subject to Davis-Bacon Act regulations on wage rates, fringe benefits and holidays. This substantially inflates labor costs. Many states have their own versions of this nonsensical federal requirement which inflates the cost of public works paid for with non-federal funds. There are also project labor agreements (PLAs) which some states negotiate with unions before putting projects out for bid. Using a PLA is justified as a cost-saving measure to the extent it resolves potential union work rule issues in advance, but the same PLA will still inflate costs by specifying bidders, unionized or not, must pay union wage rates.

I can't say I believe GPP can be used to measure economic prosperity or productiveness during ww2. We had demand from the US military, UK, Netherlands, France, Finland, etc for US military products such as tanks and planes prior to the US entering the war. This certainly helped stimulate the economy. Then once the US entered the war, how many service people were taken off the job rolls? This combined with increased jobs for the war effort shrank the labor supply and forced wages up. Higher wages encouraged people to spend more and these factors caused the US to be lifted out of depression. I am not endorsing Bernanke's stimulus plans, however, as I think war and peacetime are totally different economic circumstances.

Very interesting analysis, but I would challenge your assumption that government spending is meddlesome to private sector interests at all times. My read on your facts indicates government spending increases are a supplement to private sector under very important and otherwise trying times, ie. an economic depression, war, famine, pestilence, etc, when what capital still remains is horded in the private sector, and not used to help pull us out of the economic turmoil. That is what we are seeing now. In the private sector, we see incredible profits by many of our large corporations at a time of economic calamity and massive unemployment. How can that be? Simple, the corporations are castling, laying off large numbers of employees to keep their balance sheets high, and to show profit despite lower sales. They are also doing everything in house, as much as possible, which kills the middlemen, and thousands of small companies across the country are folding. Although I understand the motive, it hurts the overall economy, especially since more than 70% of our economy is driven by consumerism. Where does the vast majority of that consumer input come from? Usually the less affluent portion of the population, the part which lives from paycheck to paycheck, and must spend whatever they earn. Small business is a major driver. When they are out of work, the consumer engine of our economy suffers massively, and the economy at every level is hurt. While the affluent and large corporations horde, and stop spending to ensure they are not hurt further by the downturn. A vicious cycle, but if you read history, it is one that is frequently repeated. Government is about the only avenue to turn such a thing around. That is one of the reasons we have government. Not that government has done a good job. The government has become too "private business" oriented, and forgotten its raison-d'etre. They didn't save during the good times to fend off the bad, so now we borrow. The public has become a part of the problem, assuming government should show a profit, which is not government's purpose. They are to maintain our infrastructure and defense, neither of which are in outstanding condition, because we are expecting them to be profitable. Crazy! Government is us in America. It is whatever we put into it, and, frankly, we've been cutting back, while telling it to do more for us. No wonder our economy stinks. Right now, government is still the only real big push available towards getting the consumer engine back on line. Private business is doing a really lousey job of that. Government must take over when we are threatened in such a way, or when we are threatened with the calamity of war. Private industry can help, but war and the fear of market instability are not their forte. I don't work for the government of this country, or any, the government of America works for me and you, if we make it do so. GDP is correct sometimes, GPP in others. I wish GPP would pick up the ball and run with it, but history says that isn't too likely right now. Its time not to damn government, but help it help us. Otherwise, aren't we in essence damning ourselves? Just an American, wishing the best for us all.

ummm, so the problem of hunger can be solved by shooting the farmers and letting the hungry eat cake?

As a small business, I am doing a lousy job because of government. Yes I know the government tells me they are only asking for the billions I keep in my cookie jar, but I am so incredibly stupid and ignorant I don't know how to open the jar and I just have to let my superior masters explain it.

Pardon me while I beg to differ in every conceivable and possible way with your flat-earth worldview. If you believe we private businesses just have to stop being stupid and ignorant to pay your trillions in waste, I am afraid I will just have to continue being the designated idiot.

From my viewpoint, the only way I can do my job is for government to dry up and shrivel.

There is an additional item to mention as part of the GDP: taxes. The higher the taxes, the higher the GDP! That's another kind way by the Gov't to boost the GDP, as GDP sums up sales including federal and local taxes.

One big thing missing is that WW2 removed 12 million unemployed and
put them in the Military Service.
That knocked the devil out of the unemployment rate.
If that many were in our military today, the unemployment rate would
be below 5%.

This constant propaganda vision of an unregulated private sector utopia must stop!

Given the recent plague of lax regulation in the banking sector, isn't this a bit irresponsible? Massive private sector wealth concentration is superb at corrupting regulators and destroying competition. If you'd prefer a new generation of robber barons, just come right out and say it.

It's nice to see someone finally reveal the ruse of GDP. What's needed are privately produced yardsticks that are not open to government manipulation; for productivity, employment, and inflation. The official yardsticks are little more than propaganda.

Your analysis is a perfect explanation of the bias on the right. Perhaps you don't like the manner in which GDP calculates government spending, but your GPP assumes that government activity is not "real" activity…that the salary of government employees is not real, or that the planes they buy from defense contractors don't count. That's a bigger distortion! Suppose we considered GPP for a communist country where everyone works for the government: it would be zero. But we know that the economic activity would not be zero. Now it's true that we're far better off with a free economy because freedom is preferable over concentrated monolithic power. But to say that government spending is not part of the "real" economy is really nonsense. The idea with Keynsian solutions and the New Deal was that when the government hired unemployed people, they had jobs and were paid with real money. To simply call government spending "fake" merely doesn't reflect the reality that those jobs are real to the people who have them. Teachers, police officers, etc….These people have real jobs. If you say they don't count, then of course you're going to find that cutting government to the bone and decreasing taxes will always help GPP. How is your view any more objective than GDP?

You so uninformed as to the actual functioning of the economy it is scary. That you are promoting this as serious analysis is sad. GDP is the measure of actual economic activity taking place within the borders of the country, GPP is the measure of economic activity the private sector engages in as a *response to* the demands of BOTH private (consumers and businesses) and public (government – various levels). When a recession occurs private demand decreases significantly. Until peoples' expectations (in aggregate) change private demand stays depressed. Something must occur to alter expectations in order for a recession to end. Government spending is a simple way to effect that change. Other things might work, but spending dollars is guaranteed to work.

Incredible! All you need to do, if you cannot or will not work is steal someone's credit card and max it out?

If you were paying that bill, which I am, with no hope of recovering any of the costs, I don't think you would be making such remarks.

Nonetheless, ignoring the fact that slavery is immoral, the government is not producing net economic growth. While you can cherry-pick, the whole, combined budget of almost all levels of government above the smallest communities reduces the whole, combined economy.

That's why living in countries with intrusive governments is no picnic.

Roger, you say that:
"Then how would you explain the dismal failure of QEI and QEII"
But I say that:
Then, how do you know that QEI and QEII constitute a dismal failure?
That is just a statement without proof.
I can equally say, without prooof, that QEI and QEII constitute a spectacular success. For without the QEs the recession would have continued and been twice or three times as deep. That in turn would have depressed the revenues of the governments even further and further increased the requirements for government borrowing and so forth and so forth … or failing that government bankrupties and a worldwide collapse.
Eventually you may have had 40 or 50 percent unemployment, millions more of foreclosures, untold numbers of bankrupties of banks and yes private businesses etc. etc.
By then you would be well on your way to being a failed state ….
In short QEI and QEII saved the country. At that time you could not be more successful than that.

John: To a point you are right, however where does the Government get the money from to spend. You cannot spend more then you take in period. That is why the country is broke now. Also before when the Government spent money, it was backed with Gold. Not so anymore, so we borrow & we print up monopoly money, sure ways to speed up getting into real debt. S & P should have downgraded the USA credit long ago. Mabey that would have awakened some of the members of Congress. If your or my debt to income ratio was as bad as the Government, we would have ZERO CREDIT.

The problem that I have with economists is that rather than economics as science, as in being a subset of psychology, anthropology, and sociology, it is treated more as ideology, philosophy, and religion. For example Martin Hutchinson makes a rather disingenuous point in:

"You see, private-sector output is measured by the price people are prepared to pay for it. But government output is fudged: It's measured by its cost."

But so is private-sector output fudged as it also ignores costs when calculated by most economists! So, people get brain cancer from improper dumping of toxic waste from a chemical plant, as happened in McCollum Lake in McHenry Illinois, and the costs of treatment for the cancer is added to the costs of the funeral that is added to the profit made by the company when it failed to responsibly treat and dispose of its toxic waste.

Proper regulation would have not only would have prevented the pain, suffering, and needless deaths but also would have reduced the calculation of GDP that Mr. Hutchinson contends makes more sense even though it ADDS the cost to private citizens.

The GDP thing is not just a contrivance of Keynesian economists, it's a contrivance of ALL economists who refuse to see costs that don't matter to them. The problem is with economics. It isn't science in most cases and will be twisted to serve the purpose of the "economist".

Whilst I agree GDP is inaccurate and deceptive I dont see GPP as much of an improvement as private sector debts of little value (eg. bad mortgages) or inflated assets, will count towards this figure. The two greatest recessions/depressions in recent memory, the 1930s and the current one, has its roots in massive private sector debts with little chance of repayment, and overvalued assets that supported the debt, not government mispending.
The fundamental source of real economic growth, whether you are a shopowner or a government is producing more and getting more income than you are consuming, as this leads to reserves which increases purchasing power, therefore the best measure of whether the economy is doing well is a ratio between production and consumption, this would have predicted America's downfall decades ago as people would have realised the US was on an unsustainable path of overconsumption and underproduction and only the dollar being the reserve currency enabled purchasing power to be maintained.

Quit navel gazing. It is an occupational hazard of the mathematically inclined. I was at work during WWII building ships for the US war effort. That felt like GDP output to me, even though some of them sank.

I would say that John Harvey did not quite understand the whole article. Mr. Harvey states that "spending dollars is guaranteed to work". QE1 and QE2 obviously did not work at all, it made things worse for the little guy even though it enriched the bank accounts of the wealthy.

The true 'ruse" is the content of this article. "In the real world, however, this makes no sense. Indeed, none of the examples above actually add to economic welfare." Economic welfare is enhanced by wages paid and demand increased, all the while the multiplier effect increases the velocity of money. Also, "if government output were truly cost effective, the private sector would've already taken the initiative (and probably done so at lower cost and greater impact)." Right! Our for-profit healthcare system is a great example of private sector superiority! It is time to temper and meld the two extremes of Keynesian and supply-side dogma and develop a system that leads to a win-win outcome. The anti-government, anti-tax, deregulation mantra has run its course. It's well past the time to try a third way!

Nice job, Mr Hutchinson. You still need some work with that theory, though.

As Jonathan pointed out, there is the obvious problem of a comunist nation such as China or Cuba. You also have the problem of school officials, judiciary, police, road constructors, and others.

I propose that you make up a graph for us such as the one I am going to describe right now. Make this graph, make an article such as the above explaining it, make it multinational, such as one graph per economy for a few different economies (note that I don't mean US, California, and Florida only, I mean US, Cuba, Brazil, UK, South Africa, Nigeria, India, Paraguay, Spain, Canada, etc), and finally get your work published in a economic book.

Type: An XY graph.

Axis: The X axis would be the years, 1901-2011. On the Y axis would be amount of billions of dollars. Only 2011 dollars would be used in the graph, to avoid unit distortion.

Series graphed: GDP, GPP, GGP (Gross Gubernamental Product). GGP would be needed as a control value.

Special features: The type of economy would be highlighted across the X axis: normal, recession, depression, war, etc. These would be color coded and ensure that this factor would be taken into account by somebody who does not know the economic history of the particular economy.

Sounds like a lot of work? Yes, it is. But what did you expect? You are proposing a change in the way that the entire world measures economic performance. Nobody can hope to be able to do that without sweating. Do this, however, and you will have started a discussion that could give you a permanent place in the world's economic thinking.

This is an infantile view of the economic system. The government expenditures are precisely the same as individual expenditures or business expenditures or union expenditures or professional organisation expenditures or charitable institution expenditures or any other kind of expenditures .
After all they are all private expenditures ultimately. The businesses are collections of individuals just like the unions are collections of individuals and the government is the ultimate collection of all the individuals in the state. The government of the people by the people and for the people. All these people are private persons.
As to the value of the various expenditures? Well show me how all private person expenditures are so much more valuable than government expenditures or all business expenditures are so much more valuable etc. etc.
The whole article is just another attempt at obfuscation.
The GDP is the sum of all goods and services produced by the economy as a whole. GPP is a subset of this total aggregate and nothing more. So is government spending, private spending and everything else.
I may personally question some government expenditures but I also question a lot of business expenditures and private person expenditures etc. etc.
If the way the government spends it's money is so bad why oh why do so many supposedly smart private people invest in government bonds into the trillions of dollars ???

Government expenditures nowadays are typically directed into areas of the economy that are far broader than they were in the past. More and more money is being driven into these sectors due to political considerations rather than economic ones (incentivizing home ownership is just one example).

Furthermore, due to political encouragements created by laws, rules, and regulations, investment is also being directed into areas that might be better spent elsewhere.

Consequently, expenditures on a scale never before seen in history are being driven by perverse incentives not created by the free market, but by central and local government direction. And worse of all, they're being funded by taxes collected from productive activity.

As was shown in communist countries in the past, it's only a matter of time before the government-directed funding can no longer be supported by taxes on the productive, as those sources of funds start drying up once the government spending sucks more and more from that area and diverts it into places that make no economic sense—just political sense.

What's left after that?

Money-printing.

What's left after that?

Inflation.

Where are we now?

Why do supposedly smart people now invest in government bonds? For the same reason that people left their money with Bernie Madoff. And even more unfortunate, a lot of the trade in bonds is being done by those who think they’ll be smarter than the bigger fool. When they discover that they’re in fact the bigger fool themselves, it’ll be too late for all of us.

All private businesses engage in incentivizing. It is called advertizing. Yes even the banks, in cahoots with the real estate industry, advertize and incentivize people to borrow money to buy houses thus spreading this cancer called "home ownership" and enormous private debts called mortgages.

Let me be more explicit. Do you think that the food industry should be concerned about their customers? No, the food industry should only worry about their shareholders. Yet their customers are gaining weight beyond all belief largely thanks to free market incentivising. If the advertizing did not work the private businesses would stop at once under your free market system. But they know the advertizing works and still they continue slowly killing their customers because they know that their customers are easily mislead.

Should the beer companies, the wine companies indeed the whole alcoholic industry stop advertizing? How about soft drink industry?

Let us take another perhaps less controversial product called the PC. There is no question that the overwhelming majority of the people buy PCs that they do not need that sit idle 99.999999 percent of the time. Do you think that Dell, Lenovo, Apple, Microsoft, Corel, all the other affiliate industries such as network companies should stop incentivizing their customers and advice them on how to buy smaller and less expensive PCs, software and networks?
Should I go on and on? How aboout the tourist industry who advertizes how to go to a totally alien place where you will find a totally american hotel restaurant or bar. Their you can partake of the very same food and drink that you get at home and that you do not need, further increasing your girth and the profits of the various chains of hotels restaurants and bars. Millions of tourists come back home without having seen anything of the alien places they went to.
How about agricultural equipment? Do you know how many tractors are standing around unused most of the time? How about their peripheral attachments? Is that productive?
We can go on and on and on.
You think those are all good old private enterprise expenditures? Were they productive in any meaningful sense of the word?
Do you propose to stop all advertizing? Is advertizing a form of perverse incentive? Are you the final judge on what is or is not a proper expenditure?

Government expenditures find their way into every area of the economy and every sector regardless of any directing done by the government or anybody else. Exactly like private expenditures find their way into … I think you can fill in the blanks.
Political considerations are just one of infinitely many considerations why money is spent rather here than there, for purposes that I like or not like. Politics is a part of the economy whether we like it or not. In any case, the economy is much bigger than the politics.

You say that government funding comes from taxing productive enterprises but you do not say that government pays productive enterprises to produce the government goods and services thus making these enterprises and the government more productive and profitable. The enterprises, often unwillingly in a totally irrational way, pay the government taxes so they can flourish under the government provided goods and services. Why not say that the productive private enterprises tax the government when the government buys goods and services from the private enterprises?

So called communist countries failed not because they were communist (most were not) but because they were bad economists. They chose not to look at the economy as a whole. In other words they thought they could just let the government be the whole economy. They thought they should just look after GGP and ignore the GPP and GDP and other GxPs. Some of the remaining communist countries are doing a lot better not because they are communist (none are really) but because they learned some economics.

According to you all defense contractors should close shop because the money they get from the government is for purely perverse political reasons. So should all people bulding highways, schools, hospitals or whatever else…. The list goes on and on and is found in every sector of the economy.

According to you all the stupid people holding 14 trillion dollars in government bonds should sell them forthwith and invest in truly private enterprises. How will they know that they are not investing in another Bernie Madoff private enterprise or another Enron or another .com bubble, or a tulip bubble or any other bubble yet to be invented by the free market ?

Indeed, where could they invest 14 trillion dollars based on a free market incentive without causing enormous asset inflation somewhere in the non-directed private economy and subsequently causing the next boom, bubble and bust.
I suppose you think they should al invest in gold until the dust settles or we can go back to the gold standard. Do you think that the people currently invested in highly overpriced gold are making a wise and productive investment? What exactly and how much does an investment in gold produce?
Surely, the incentive to buy gold is created by the free market therefor it must be a good productive investment. I know of no government incentive that will cause me to buy gold.
Stay tuned, the next bubble will be the gold bubble.

According to you, the trillions of dollars of credit granted to private citizens under free market conditions should be taken back and invested somewhere productive because we do not really know if the credit will be spent wisely nor if these private persons will ever be able to pay back their loans. After all they could loose their job at any time.
But we do not know where to invest these trillions of dollars in a productive and efficient manner otherwise those trillions would already be invested there and not in private citizen credit.

Similarly with all private business credit because we can not know if the businesses will spend wisely like Bernie's business and be able to pay back the loans. After all they could go bankrupt at any time.
But where will we invest the trillions now given carte blanche to all these potentially irresponsible businesses?

According to you we should stop all credit and bring the economy to a screeching halt. That is called recession, right?
No, that is called depression the very deepest depression ever. When we then discover that in fact we are the bigger fools it will indeed be too late for all of us.

No, the artificial breaking up of the economy into convenient pieces that you "like" and "not like" is not the way to look at the economy. And it certainly is not the way to run the economy. There may be a passing interest to look at one part of the economy or the other but it is not the real thing.

The only way to look at the economy is to look at the whole economy with all it's marvelous accomplishments and it's very many warts. And not only that. It should include the global economy, including the communist, totalitarian, kingdoms,dictatorships, republics, parliamentarian and every other variation of economy that is currently measured by the GDP (global domestic product). GDP may not be the best measurement but, until something truly better shows up, it is . Until then we should stick to the GDP.

Finally because of recent and current circumstances a lot of people have lost nerve and gone into a panic. FDR, that socialist president, said " we should only fear fear ", and nothing else not even credit …

If we can increase that much maligned GDP by stimulating the economy by any means possible including a huge expansion of credit we will be able to make money, have jobs, pay taxes and pay off all these debts including all government debt and return the money to the rightful owners who will then turn around and reinvest the whole lot in … you guessed it … private person credit, private business credit and public government credit. You will then have a sparkling and flourishing economy fully based on GDP and credit precisely like it is now.

The way to stimulate the economy is for the government to start spending, the private citizens to start spending and the private businesses to start spending so we can all work and pay off our debts. Unfortunately we are not able to convince the people who are full of fear.

People are fat because they have access to food and healthcare, which has been made free-market-less due to government intervention (food stamps, Medicaid, Medicare). Therefore, people get fat and go to the hospital, yet do not understand the actual economic consequences of what they have done. Advertisers are responding to the perverse incentives created by government intervention that give people access to food (bad food, in many cases) and medical care.

We saw this dynamic in Brazil over the past 10 years, where the government initiated a program known as “Fome Zero” (Zero Hunger). Many poor were no longer hungry, but they’re now getting fat, and obesity is a serious problem in a place where it didn’t exist a decade ago.

Never have so many Americans been on food stamps (1 in 5 right now). Yet, why are we so fat?

PCs are not subsidized by the government. Plus, that industry is constantly in deflation. Prices continue to go down, yet the power of PCs keeps going up. I think that actually proves the benefits of the free market. Plus, the Internet is very, very lightly regulated.

Tractors are partially subsidized through agricultural subsides. Maybe you have a point there. We might have too many tractors.

Of course government expenditures make it into every corner of the economy. That’s the problem. If the capital is generated from productive government activity, and not the redistribution of tax revenue, it might be sustainable over the long run. Some elements of the space program and the Internet that came from DARPA are shining but rare examples. Much, much, much more money has simply gone down the rat hole. That’s why we deficit spending, have huge government debt, and an enormous trade deficit.

Government does not create value on a grand scale. Only private businesses can do that. And yes, because our economy has become so distorted due to ever-greater government intervention over the past 100 years, the odds are quite good that the only way back to a sustainable economy is a massive depression and fundamental restructuring of our entire system.

What’s the alternative?

We’re probably doomed to an ungodly slow recovery, a bond collapse, a sovereign debt crisis, a currency crisis, and terrible inflation if the central bank feels forced to intervene.

"The GDP is the sum of all goods and services produced by the economy as a whole."
No. GDP is an estimate… not an accurate number. If you underestimate the deflator/CPI, you can get a higher number than you ought to.

I liked your article. Those who counter that WWII gave jobs to the producers of war materiel and to the 12 million soldiers who fought that war are pretty typical of the Krugman Left. They ignore the fact that (i) producing war materiel instead of consumer goods resulted in shortages of just about everything on the U.S. home front and (ii) most of the the soldiers would have preferred to remain home pursuing a greedy capitalist lifestyle. The Krugman acolytes would like to mobilize the population in a government-planned economy, just as the communists did. The U.S. population could support a war, knowing that their sacrifice would lead to an earlier resolution of the conflict and normal life would resume. If they thought that the wartime lifestyle imposed by the government were permanent, as in the communist economies that Krugman admires, they would not be impressed by the jobs statistics.

We are all victims or benefactors of our background and experiences. Martin Hutchinson is a shining example. When he assumes his all too frequent and ill-advised role as a political analyst, he tends to drift off into the weeds of his European socialist mindset and academic background and demonstrates his great ignorance of the American culture and our national political psyche (over which we fought a couple of wars with England). But when he puts on his banker/mathematician hat, he dwells in his area of competence and does Cambridge proud. His brilliant analysis of the failings of the GDP economic model is the most concise and lucid I have ever read. Well done Martin…you deserve a big ATTABOY! It would be very enlightening if you could go to Jackson Hole, Wyoming instead of Beranke and present an economic game plan. We just might get off the economic road to hell we seem bent on traveling.

"Government spending is a simple way to effect (expectations). Other things might work, but spending dollars is guaranteed to work." That borders on hilarious simply because it hasn't happened with the most recent round of spending. GDP has increased and yet there's no actual growth resulting from the "increased economic activity." So you're wrong, you say Martin is wrong, Krugman is generally wrong, Thomas Sowell is wrong, Benjamin Anderson was apparently wrong when he disagreed with Keynes, Samuelson was wrong, need I go on?

What you've described has never happened in fact. So you're wrong too. You want a QE3. I want tax breaks that level the playing field and bring dollars abroad home. I'm also wrong no doubt. Enough of this 2012 campaign foreplay. Let's just elect someone who has actually governed one way or the other in a state and candemonstrate it works. A big state. A state in the black with real measurable economic growth. Too bad if it doesn't fit my paradigm or yours. I want someone who can look President Obama in the eye and say, "can you say 'if it ain't broke, don't fix it' like I can? I can think of a few candidates who would qualify.

I'm not being contrarian just for the sake of it, but I think that article is irresponsible and an even worse fraud than the apparent Keynesian economics it supposes are not above board.

I do however agree that it is useful to analyse private sector growth against government spending, but for different reasons than it is a "fraud'.

First, in war, investments in bombs, men, tanks, bullets are destroyed. Capital is not saved. Once the government spends on it and then it is blown up, its gone. That means the investment governments make are inherently not going to remain as capital stock.

In peacetime, investments store up value in capital, are kept on the books of businesses and government alike, which can be leveraged to create more wealth. And the types of wealth stored are different. A government might buy a desk not a bomb. The desk has resale value.

Second, the crowding out effect is not taking into account. in wartime, technicians and other skilled workers must, to save a country, go to work doing their duty. They can't work in the private sector, lest the country be overrun by aliens. That just puts limits on the private production capacity, not to mention that free flowing international trade is disrupted, in many cases so that even if companies wanted to make certain goods they are restricted by higher costs, insurance rates go up for shipping, some companies will hold off on investment in ships just because they don't want them blown out of the water.

No, I don't accept your arguments on the background causes of the GDP/GPP difference during wars Mr. Hutchinson. But I also disagree with people suggesting a war footing is the best way to prosperity. That, also, is irresponsible. Wars and fear mongering are just ways to pervert the natural course of market forces away from continuing capital restructuring required to benefit all. Wars are not to the benefit of the man on the street. He is the pawn. Wars place the power of all our tax-funded capital into the hands of a few privileged people with inside tracks to supply vested power interest, to the exclusion of markets, providing access to that tax capital. War is a way to exclude our capital from the free-flowing nature that makes markets work and private sector ingenuity have its greatest effect on our lives. That, I think, is born out empirically in your analysis.

Many individual states in the United States have experienced the same type of "growth". Many of them appear to have grown over the last 30-40 years but if you live in them and try to get a "real" job the truth will be revealed.

This leads me to wonder why Washington has not been reducing its bloated bureaucracy. 25 years ago many, if not most, American corporations instituted what they called "early retirement" programs whereby older employees were offered (told?) retirement packages based on a combination of years of service plus age. Why can't our federal government do the same thing? During his campaign, Obama pledged that he would review the federal budget line-by-line and use a scalpel to cut many programs. Why hasn't he done that? The "G" part of GDP has become totally out of control…compare it to the 1960s when I first started studying economics. Of course back then America was always a net exporter and it was never dreamed that that part of the equation would ever end either.

Wouldn't it be better for BOTH measures to be used as a matter of course? This would make the overall picture much clearer and perhaps light the way for a more targetted approach to managing the economy. John Harvey says spending dollars 'works' yet there has been no improvement after spending $800 billion. Is it not enough? Where is all the money coming from anyways? QE3 will be the final nail for the dollar and it's scary that it is so close to being reality. And I think Chavez's demand for the return of gold reserves will expose a HUGE hole somewhere. We've been led around by the nose by the big banks for too long.

Such idiotic, hypocritical nonsense. If the government spends (and that CAN create jobs and tangible, lasting products), it isn't real. Like the interstate highway system and the transcontinental railroads (both built with government spending / subsidy) weren't real / a waste. AND If the government actually wastes money (the Republican led "bridge to nowhere"), then that money wasn't really spent / doesn't contribute to the GDP … must have been built by phantom workers who received "funny money" for pay and then didn't spend it anywhere in the "real economy". By that "reasoning", all the money Ford spent on the Edsel flop wouldn't count either!

And Krugman merely compared some hypothetical need for space defense due to aliens to what actually happened due to WWII. WWII hardly "damaged" private output OR profits! Indeed, it spurred MANY innovations that private industry put to use during AND after the war to INCREASE outputs and profits.

There ARE some good points and arguments to be made concerning Keynesian economics. This article just is not among those!

Really? Building guns, tanks and uniforms during WWII was not part of our gross domestic product? And the research conducted by FDA and other gov't labs today, and the inventions they produce are not valuable additions to GDP? And of course, you skim over the 9 million teachers, 1 million+ hospital workers and same number policemen, etc, with the brief comment, "Don't misunderstand – some government output is very valuable."

Yes, I know you believe most functions belong in the private sector, but it is simplistic and misguided to believe you can subtract their work from GDP.

Talk about misleading numbers! You didn't think this through at all. Or did you buy a high school essay off the internet for $10? Hey – add that to gross private product!!

The United States country is full of fraud.Absolutely there is no reality and it does not carriers any meaning in US.For the last twenty, thirty years back the whole world believed it make big thing to live in US and all believed that is the way to go in one's life and today it has been turned quite opposite.Now the US is doing more harm than good for world scenario.

The idea of separating GDP in two parts seems inadequate to me since money flushing the system is what the private sector and ultimately our population benefits from. For example, if the Government decides to push up the economy by way of spending money in the construction of roads or bridges in the fartest Alaska where only polar bears would probably walk through, then construction companies would be appointed for the job. The nicesest thing of this is that whatever the amount of the contract is finally arranged for it will nonetheless be accounted for under the Construction Sector by The National Statistics Office. The point of the matter is that Private Sector does not walk alone in this equation concerning growth, instead, it is a joint venture where consumption is the ultimate aim in any economy.

To satisfy our needs as citizens we need to be assertive enough. 90% of the population reach their goal. The influence on government spending, regulation or deregulation depends on the capacity to spend money and lobby, for which at most 10% of the population have enough capacity. Some of us profit by jumping on the train, most of us suffer though by paying higher taxes for getting less return by government spending, because the government has to pay the 100 Millions a year income of quite a lot of CEOs of bailed out banks who do not pay the equivalent amount of their income in taxes. The taxes are mostly payed by citizens with middle income which subsequently get poorer, subsequently can not buy the products of the enterprises that create "real" products. Subsequently the bankers get less money from their investment products and have to invent new even more derivatives without substance (fraud). Because this always has a more of less forceable end, the citizens without lobby impact on the government decisions have to pay the bill. Because they are a major force in the upcoming elections. In order to stay in power the government tries to provide bread and games to the 90% to back the interest of the 10% of the billionaires who do not pay taxes. Warren Buffet is right if he claims that his secretary is paying more taxes than he is. Primary school children could tell that this is a procedure that in the end leads to the decline of the entire system (compare the ancient roman empire).
The goal would be a more democracy. Which means no funding of parties or single politicians by short term own gain long term public pain oriented lobby forces. The democracy that should serve the majority is not existing anymore (if it had existed ever), the well funded demagogues rule as oligarchs. Change that, sheep!

What is needed is some honesty, decency, morality in both the government and private sector. The bank mortgage makers, and mortgage backed securities, and leveraging like 1000 to 1 is downright criminal and they should be in jail, along with the private health care criminals. But they have bought out our politicians, and judicial system and the rot is everywhere and bringing the system down. Our private health care system is a disaster, immoral, criminal, disgusting but still being forced upon us by the rich. Our politicians just gave the rich bankers trillions more of our money. allow banks to lie about their actual value, let the fed steal from us by printing worthless money, lie to us about the real unemployment, 22% inflation 8% keeping those on Social Security from getting the adjustment, borrowing from Social security, our saving and making it insolvent. Our system has become totally corrupt and is falling. There are few honest "leaders left" and they are laughed at. The average American is getting screwed kenseneyan or otherwise and it is time for us to wake up, throw the criminals out and find someone who has some character.

"No alien invasion,real or imagined, is called for."
Perhaps you do not recall the 1980s. Mr. Reagon was president of the USA. He imagined a real possibility of a Soviet (alien?) invasion. His early years as president were marked by huge inflation. He took draconian action to correct that problem. I recall earning 18 percent on guaranteed income certificates. This was followed, naturally by a severe recession. Mr. Reagon went on a spending spree to preempt the imaginary Soviet invasion. The economy improved remarkably and Mr. Reagon added 4 trillion dollars to the debt of the USA government.
Mr. Bush, his successor, said "read my lips, no new taxes" and continued the spending spree. The Soviet invasion and economy collapsed.
Mr. Bush added another trillion dollars to the debt. Subsequently he was forced to eat his own lips so to speak and he, very wisely if somewhat late, increased taxes. The economy continued to improve. This allowed Mr. Clinton to eventually start paying off the debt while the economy flourished under the tax load.
Flourished, that is, until that same economy was rudely interrupted by Mr. Bush junior. He cut taxes and stopped paying off the debt. He was faced by a real alien(?) invasion went to wars and kept the tax cuts in place and added trillions to the debt.
From then on the economy went downhill, to hell and would eventually have fitted in a handbasket.
Goes to show that imaginary if not entirely alien invasions do work wonders.
It is remarkable that Mr. Reagon, Mr. Bush senior and Mr. Bush junior all equally disliked large government spending and piled on the debt. I am sure they hated the way the GDP was calculated and would have preferred to just keep track of the GPP. Mr. Clinton on the other hand liked big government, huge growth in GDP, did not care a wit about any GPP and paid off the debt.
One can only wonder.

Coming from Sweden I have great difficulties following much of the reasoning. While I totally agree that GDP growth is totally misleading as anything like a welfare indicator – primarily because GDP does not distinguish between quality and quantity – I cannot understand the almost vitriol attitude towards anything financed by the public sector.
OECD statistics jas shown again and again that the US is at the bottom of the list in OECD with regard to all major welfare indicators. Health in general, Infant mortality rate, Education in general, School drop out rates, People living under the poverty line, Income inequality, Infrastructure, GHG emissions, Water use and so on. Who is going to address such problems? The private sector?
As already stressed, GDP should be abandoned as a welfare indicator. But to replace it by GPP seems ridiculous. Instead it should be replaced by a set of well-defined welfare indicators. We need a decent balance between the public and the private sectors. The public sector is the only one that can effectively provide public goods – and public goods are in serious decline, not least in the US.
Look at Scandinavia – all the scandinavian countries are at the top of any international comparison on most welfare indicators. The reason, of course, is that we have developed a well-functioning public sector and are financing it through taxation. People in general are happy and society functions well. WE have one of the most vibrant business sectors in the world. Hence, the debate on the role of the public sector – and taxation – in the US strikes us as almost unreal.
Finally, the most serious shortcoming of GDP is its failure to tell us anything about the health of natural capital and ecosystem services. We treat natural capital as if it was infinitely large. Which it is not. Overfishing ends up as a positive in the GDP statistics, but the depletion of fisheries is nowhere to be seen. This is just one example.

It makes good sense. Some government expenditures for infrastructure I believe should be included–expenditures for highways, airports, etc.

I would like to offer a comment on unemployment. The unemployment measure is faulty in the sense that many of the unemployed refuse jobs because they do not pay enough. Their unemployment pay, and other government dole is sufficient to cause many to refuse jobs because they do pay enough to make them want to back to work. Its the old 'welfare' bugaboo., where they won't enter the labor force because the welfare pay is high.
In prior economic times those lesser paying jobs either would not be filled or those hiring eventually raise their wage to attract workers. Today the lower paying jobs refused by the unemployed attract immigrants to enter the workforce to take those jobs as they pay better than those of the home country. Hence we have an immigration problem.

I think the analysis would work equally well for the UK (after all Keynes was an Englishman). I agree with Gregg that charts are required illustrating the difference between GDP and GPP, and appropriately annotated.

Folks, we should critic the way TARP was structured and handled from the beginning. It was Fiscal policy gone awry. TARP was a great example of how Fiscal policy can be rendered ineffective by converting it into Monetary policy. And, here's how it happened this time.

TARP funds' ineffectiveness: Yes, that was guaranteed by the way it was structured by both Tim and his predecessor, Henry Paulson. Normally, fiscal allocations would result in government spending / projects to which the private sector would respond by providing products & services, which is what leads to job creation in the private sector.

Unfortunately, this was the first time the Treasury handed over billions of dollars to shore-up the big banks' capital base. With the capital base re-built these banks were now expected to start lending so that businesses get the necessary liquidity to start doing what they are best at doing, especially the SME sector which creates more jobs.

Instead, the big banks took the TARP funds, increased their capital-base to make their balance sheets look better, paid their executives large bonuses, BUT DID NOT LEND EITHER TO THE BUSINESSES OR TO THE SECONDARY CAPITAL MARKET from where the SMEs borrow. Liquidity boost to the economy that was expected did not come in full force (there was some small impacts which resulted in jobs growth in fits and starts).

Hence, Fiscal policy (using TARP funds) that could have been directly spent on much needed projects were rendered useless by handing over to the big banks. Sadly, both Paulson and Geithner failed to realize that they were abusing Fiscal policy by effectively making it as spineless as Monetary policy in times of economic crises (when expectations take a beating).

i'm not an economist nor particularly brainy but it seems to me that if we lived on an island with a stable population, and never exported to, nor imported from, the rest of the world, then the gross domestic product would be the total of government spending and private consumption. all trade would be internal. those that produced goods would be paid for their labour. they in turn would buy other goods and services, and pay taxes. the owners of the goods and services providers would cream off profits that would also be taxed (at a lower rate, probably), total annual tax-take would pay for as much of the infrastructure as could be afforded each year, and the lives of the population would be enhanced year by year (schools, hospitals, infrastructure etc.). but would the total money supply change? would it keep on growing? would it need to? if it did then where would it come from? it wouldn't be the government printing more dollar bills would it? and if it was would the dollar be worth what it was? could it still buy the same as it did last year?
seems to me that in a closed society like this island, wealth, total wealth, could not be increased. all that would happen would be that certain people would get richer, most would get poorer, but the quality of life would continue to improve as the government spent its taxes. eventually the taxes on the rich would have to be increased as the tax-take from the poor would decrease. pretty soon the non-producers, consisting of local and national government employees, would play a major part in the economy, as they would be consumers, and so the money supply would circulate and the island could boast a utopian society.
now let external goods be imported! the island could, wisely, only pay for imported goods with exports. or it could, not so wisely, deplete its treasuries to pay for them. not a good move i think. or it could, foolishly, pay for its imports with credit. when the exporting countries ask for their money back the island could deplete its treasuries, could devalue its currency, or could default. or it could stop importing on credit, ramp up exports and pay down the credit. if it then passed a law that only allowed imports to the value of exports, then its economy would again become stable
in the real world governments encourage either exporting far more than they import, (china, japan, at the expense of other nations) or import far more than they export at the expense of other nations because to pay for it they use credit and then default (p.i.g.s.), or devalue (print more dollars, qeI and qeII etc.). or they throw away the gold standard and become a fiat currency and reserve currency so big that large holders of that currency are too scared to rock the boat and bring down the whole house of cards.
anyway what do i know? i'm buying bullion as fast as i can, and when the gold price reaches $10,000 an ounce i'm going looking for an island,

Whilst this article actually points out some weaknesses with GDP analysis, you use the same approach and purport to come up with something different. I'm from the school of thought that thinks the problem with both analysis is aggregation. Otherwise… good effort.

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